Employers often offer bonuses that are conditional on the employee’s fulfillment of certain requirements, including continued employment on the payout date. When an employee fails to fulfill the required condition, the employer may want the employee to forfeit the right to any portion of the bonus. Whether an employer can require employees to forfeit their right to bonuses varies widely based on applicable state law. The following will address the primary considerations that affect this analysis in most states.
The primary considerations that affect whether a bonus may be forfeited are whether the bonus meets the definition of wages under applicable state law and, if so, whether the wages have been earned.
When are bonuses wages?
The definition of wages is typically codified in a state’s statute or developed through its case law. For example, North Dakota defines wages as “all payments made to or on behalf of an employee as remuneration for employment, whether calculated on a time, piece, job, or incentive basis.” New York’s statute uses similar language, and its case law clarifies that bonuses are wages when the bonus is contractually due or nondiscretionary.
Although identifying whether bonus payments fall within the realm of potential “wages” can be relatively straightforward, determining when and whether those wages have been earned is more nuanced.
When are bonuses earned?
While some states determine the circumstances in which bonuses are earned by statute, most have developed their considerations through a fact-specific case-by-case analysis. With respect to those statues that rely on statutes, North Dakota’s statute, for example, states: “An earned bonus is compensable when an employee performs the requirements set forth in a contract or an agreement between the parties.” Similarly, Oklahoma’s statute states: “A provision in a written employment contract or policy manual which requires the employee to be employed at the time the bonus is paid, is valid. Employees terminated, voluntarily or involuntarily, prior to the bonus payment date are not entitled to receive the bonus payment.” These states and make clear that the written language of an employer’s bonus policy or agreement govern the circumstances in which the bonus is earned, whether based on production, retention, or otherwise.
But Colorado, taking the opposite statutory approach, has explicitly banned clauses that forfeit an employee’s bonus for failure to remain employed on the payout date. Notwithstanding language to the contrary, these clauses are unenforceable. On June 24, 2022, the Colorado Department of Labor Standards and Statistics issued an opinion letter bolstering its position on this issue. Maryland and some other states have similar laws.
Other states, like New Mexico, weigh heavily in their case law the way in which the bonus is calculated and the circumstances under which the bonus is awarded to determine when it is earned. For example, if a bonus is calculated based on extra hours worked or widgets produced, courts may consider the bonus to be wages earned for work performed such that the bonus is vested and payable irrespective of whether the employee remains employed on the payout date. Effectively, an employer may owe a pro rata portion of the bonus upon termination. New Mexico is not in the minority in adopting this approach as many states have developed a similar analysis. Texas, historically, has taken a similar approach but more recently has allowed the written language of an employer’s policy to govern.
Note, however, that the circumstances under which a bonus is earned often differ from the analysis applicable to commissions; and, whether a particular payment is considered a bonus or a commission can be complex.
The Bottom Line
When and whether an employer’s bonus policy may forfeit the right to any portion of the bonus for failure to remain employed on the payout date requires a state-specific analysis as there is not a universally enforceable approach. Employers should note that the analysis applicable to commission payments often differs from that of bonus payments and separate considerations may apply. Multi-state employers should consult their employment counsel to develop a set of bonus policies that meet with employer’s objectives while remaining compliant with state law.